Stocks surged today in response to a far cooler-than-expected inflation print. The Dow, S&P, and Nasdaq Composite all rocketed higher, lifted by sinking rate hike expectations. Treasury yields plummeted as bonds rallied strongly. The 10-year Treasury yield fell to 3.84%, down significantly from yesterday’s high of 4.15%.
And it was all because of the stunningly cool October Consumer Price Index (CPI). Headline inflation was up 7.7% year-over-year (YoY) according to the Bureau of Labor Statistics (BLS) vs. +7.9% expected. That’s down 0.5% from September’s 8.2% YoY gain.
Core CPI, which excludes food and energy costs, also came in well below estimates. Core inflation rose just 6.3% YoY in October vs. 6.5% expected.
Cleveland Fed President Loretta Mester limited bullish sentiment slightly in a speech this morning.
“Given the current level of inflation, its broad-based nature, and its persistence, I believe monetary policy will need to become more restrictive and remain restrictive for a while in order to put inflation on a sustainable downward path to 2%,” Mester said.
“This morning’s October CPI report also suggests some easing in overall and core inflation,” but there continue to be “some upside risks to the inflation forecast.”
Rate hike odds shifted dramatically after the CPI came out this morning despite Mester’s comments. The market is now pricing in a near 0% chance of a 75 basis point hike in December, favoring a 50 basis point hike by comparison.
Bulls obviously loved October’s inflation data, which sparked a rally to the market’s November 1st high.
The S&P ran into resistance (yellow line) after setting a higher low (blue line). It’s also trading above the 10-day moving average, signaling that a short-term bullish continuation may be here.
It all depends on whether rates will continue falling or head higher again amid a bond selloff.
“Interest rates are still running everything in markets,” said Exencial Wealth strategist Tim Courtney.
“With today’s CPI number coming down, the market is now betting pretty clearly that they think the interest rate [rises] are coming close to an end. So, you see those interest rate-sensitive stocks doing really, really well.”
Tech stocks (which are interest rate-sensitive stocks) unsurprisingly did very well today. Amazon (NASDAQ: AMZN) led the pack, erupting for a 13% gain through noon. Big Tech companies remain down big, though, relative to their recent highs. If a more substantial rally is truly on its way, tech stocks will do most of the heavy lifting.
Apple Inc (NASDAQ: AAPL), for example, is probably the best poised among the Big Tech names to rebound and is the only company in the S&P’s top five stocks to have rebounded off support (yellow line). The rest all plummeted through their October lows due to dismal forward guidance.
Traders should watch AAPL’s 10-day moving average to see if the market is serious about staging a November rally. If AAPL can close a daily candlestick above the 10-SMA, the party’s probably back “on” heading into December, where a key jobs report (out December 2nd) could show a weaker-than-anticipated labor market due to the recent string of major firings at America’s top corporations.